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Author: MrArbitrage Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 54611  
Subject: Price War Date: 1/28/2002 1:12 PM
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Headlines:
update Intel and Advanced Micro Devices are wielding the scissors again, as the chipmakers on Monday trimmed prices for desktop PC processors by up to 19 percent.

I'm sure that's not news to most of you but I bring it up because I think it is significant.

"Intel is a cyclical". That's the common justification I get after I point out Intel's extraordinary earnings multiple. Well, it looks like Intel is following the business model of the auto "cyclicals". It doesn't look very auspicious for Intel and AMD to find themselves in a aggresive pricing war. Although, it looks quite auspicious for consumers. That shouldn't be a surprise. The consumer always wins out in the technological evolution. Competition heats up, Tech gets cheeper and quality actually gets better.

When a cyclical gets a favorable cycle, they need to get the profits while they can because the well will dry up again. That's why you call it a cyclical. When you find your company in a war with another chip maker, you can slash prices and retain marketshare for little profit or you can keep profit margins and lose marketshare. That's fine, but you are in a "catch 22" situation.

Intel will continue to be a great company. The question is how do you justify a multiple of almost 200 times EPS when your profits are going backwards by double digits while your cycle is supposedly turning favorable?

This is the same deal that is going down with the automotives. Hell yes they are selling cars like hotcakes, but at what cost?
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